Every so often a family member does something significant that makes you really proud. That happened to me this week when I learned about the full details of the role my Dad played in trying to prevent regulatory failure by the New York Federal Reserve in a pretty astonishing story that was uncovered by Pulitzer Prize-winning reporter Jake Bernstein at ProPublica and This American Life and covered subsequently by Michael Lewis on Bloomberg and by the Washington Post.
The story involves a former employee of the New York Federal Reserve named Carmen Segarra who was fired for refusing to back down from her conclusion that Goldman Sachs fell short of regulatory requirements for dealing with certain conflicts of interest. Sensing that she was working in an overly deferential regulatory system that would reject her conclusions, she secretly recorded meetings that supported her case.
The most notable smoking gun quotes were from a Goldman employee who said that “once clients are wealthy enough, certain consumer laws don’t apply to them” and from a fellow Fed regulator who responded to Segarra’s surprise at this statement by saying “you didn’t hear that.”
The background for this story is that in 2009, the head of the New York Federal Reserve asked my father, David Beim, a Professor at Columbia Business School, to write an internal report on how the Fed could have missed all the incredibly risky behavior at investment banks that helped cause the 2008 financial crisis.
After dozens of interviews, he came to a conclusion that surprised him. He expected to find a failure of financial analysis, but what he found instead was a cultural failure. The NY Fed had become overly risk averse, and its employees kept their heads down, prioritized peaceful coexistence over challenging conversations and allowed institutional consensus to weaken their findings.
His report suggested a path forward, including recommendations to find more independently-minded employees and to create a culture that would enable them to speak freely, come to uncomfortable conclusions and let the truth bubble up. The Fed sought to take his advice after receiving the report and went on a hiring spree to find more outspoken people like Carmen Segarra, although as suggested by subsequent events, many cultural problems remained.
The report had been kept secret until it was released in legal proceedings relating to Carmen Segarra’s departure from the Fed. Now it is out in the open for all to read. It is, as Michael Lewis says, an extraordinary document.
What impressed me was not only that my Dad hit upon one of the core uncomfortable truths that helped create the financial crisis, but that he did so in a thoughtful, unafraid manner and refused to bend even when the Fed tried to get him to modify his report so they wouldn’t look so bad. Pressured by senior Fed officials to remove a quotation from someone he had interviewed that “regulatory capture” set in very quickly after new employees joined, he refused to do so. This was a core failure of a core institution in the U.S. financial system, and he did not want to let politics interfere with the truth.
Courage, thoughtfulness, honesty and unwavering integrity are things I’ve always admired in my Dad. If the majority of financial managers and regulators on Wall Street were made of similar material, I honestly don’t think we would have had a financial crisis in the first place.
Postscript: The Wall Street Journal just published an article and video interview with my Dad on his report.